Market comments

In Quarter 3, the MSCI EMEA index (which includes South Africa) fell 7.02%, which was worse than the returns of that of the MSCI Emerging Markets (EM) index at - 4.25% and far behind the MSCI World’s 0.53%. Year to date, the picture does not change much with the MSCI EMEA at 5.13%, relative to the MSCI EM return of 5.89% and way behind the 17.61% for the MSCI World.

The Federal Reserve and the European Central Bank both eased policies to offset signs of weaker global growth. The US economy has weakened but is not in a recession mainly due to fiscal support offsetting the adverse impact of the trade war. The inversion of the US yield curve is perceived as tolling the bell for a near-term global recession whilst Draghi also added to the call for fiscal easing.

Adding to that, commodity prices took a dive with key iron ore benchmark prices plunging some 20% in a matter of weeks and the key industrial metal, copper, hitting two-year lows. The key global manufacturing indices have also dived and are at fiveyear lows - but was at least stable over the last two months.

In the UK, Eurosceptic Boris Johnson has become the prime minister after being elected as leader of the Tories. There appears a greater likelihood of a no-deal Brexit or, at the very least, yet another postponement of the October decision deadline. The market has discounted this in large part with a weaker Sterling. As business decisions get postponed, the UK could dip into a technical recession.

In South Africa the SA Reserve Bank held the policy rate unchanged at 6.5% at its September meeting, but its statement was more dovish than in July when it did cut. For Quarter 2 of 2019, GDP was 3.1% quarter-on-quarter, above the consensus of 2.4% and reversing the first three months’ contraction. SA headline CPI accelerated from 4.0% in January to 4.5% in March and then settled around 4.3% in August 2019. Forward rate agreements are now pricing in a 25bp rate cut in the next six months.

From an SA asset allocation perspective, cash (STEFI: +1.8%) outperformed SA bonds (ALBI +0.8%) and the FTSE/JSE All Share Index returned -4.2% (Capped SWIX: -5.1%) in the third quarter of 2019. In Dollars, the MSCI SA (-12.60%) continued to underperform the MSCI EM (-4.25%) mainly due to a weak Rand (- 6.9%). SA equities and SA bonds saw outflows of $5.7bn and $2.4bn respectively year-to-date. Properties, after stabilising somewhat over the first half of 2019, experienced a tough three months losing about -4.4%.
On the corporate side the most important news was the Naspers spin-off of Prosus, which listed on 11 September 2019. Prosus is now the largest listed EU consumer internet company.

Performance

The FTSE/JSE Mid Cap index (J201) was one of the better performing benchmarks in the third quarter of 2019, albeit returning -1.81%. It significantly outperformed the FTSE/JSE Top 40 Index, which was down 4.57%.

The Resources sector held up the index performance with the largest contributors to this performance being Impala Platinum Holdings Ltd (IMP), Northam Platinum Ltd (NHM) and Harmony Gold (HAR) - all up over 35%.Where some Industrials, like Pioneer Foods (PFG), positively contributed to the index performance(return of +53.44%), the negative return for the quarter came mostly from Industrials and +53.44%), the negative return for the quarter came mostly from Industrials and Financials including Intuprop (ITU), Telkom SA (TKG) and Truworths (TRU). There were a few poorly performing Resources in the index as well such as Assore (ASR) and Sappi (SAP), both below the -30% mark for the quarter.

During the September FTSE/JSE index review Aspen Pharmacare (APN), Hammerson (HMN), Mediclinic (MEI), Mr Price Group Ltd (MRP), Redefine Properties Ltd (RDF), Rand Merchant Insurance (RMI), and Tiger Brands Ltd (TBS) were included in the index. Gold Fields Ltd (GFI), Nampak Ltd (NPK), Redefine (RPL), Steinhoff (SNH) and Tsogo Sun Hotels (TGO) were excluded from the index. The one-way turnover for the index review was 19.07%.

The investment objective of the portfolio is to provide investors with income and capital growth in the medium to long term by tracking the FTSE/JSE Mid Cap Index (J201) as closely as possible.

Market comments

Global equities rebounded in June as the US-China trade war ebbed and Trump backed off on some of his threats. Global growth data remained negative with further declines in PMIs. Although the 19 June Federal Open Market Committee meeting saw no rate change, it delivered a strong statement, virtually promising a rate cut at the 31 July meeting.

During the second quarter of 2019, the MSCI World Index realised a gross return of just more than 4%, outperforming the MSCI Emerging Markets Index, which managed a very modest return of 0.6% over the same period. Global bond yields continued to rally with US 10-year yields down to 2.01% and trading sub-2% for the first time since late 2016. US 10-year yields are down more than 125 basis points since November 2018.

In the first half of 2019, the MSCI World Index delivered a total return of 17.4%, outperforming Emerging Markets (+10.8%). Within the MSCI World, North America was the best performing region with a return of 18.9%, followed by Europe’s 16.5% and the Pacific region’s 11.3%.

In South Africa weak economic data dominated the post-election headlines with firstquarter GDP falling 3.2% quarter-on-quarter, worse than the -1.6% Bloomberg consensus. The President’s State of the Nation Address promised little more than further Eskom bailouts and progress on spectrum auctions with few details/deadlines.

During the second quarter of 2019, the FTSE/JSE All Share Index (ALSI) posted a total return of 3.9% versus the 8% for the first three months of 2019. SA Financials was the best performer, returning 5.4%, followed by SA Industrials with a total return of 4%. SA Resources only managed a gain of 2.4% in the second quarter after the large 17.8% total return in the previous quarter. The FTE/JSE All Bond Index (ALBI) returned 3.7% after posting a similar return of 3.8% in the first quarter. Property managed to outperform bonds, posting a total return of 4.5%. Among the other important indices the FTSE/JSE Shareholder Weighted All Share Index (SWIX) (2.86%) performed in line with the FTSE/JSE Capped Shareholder Weighted All Share Index (Capped SWIX) (2.90%).

In the first half of 2019, SA Equities was the best performing asset class, with the ALSI delivering a total return of 12.2%. SA Bonds gained 7.7%, whilst SA Property was the worst performing asset class with a total return of 6%. Cash posted a total return of 3.6%.

Performance

The FTSE/JSE Mid Cap Index (J201) was one of the worst performing benchmarks in the second quarter of 2019, up 1.45% versus the FTSE/JSE Top 40 Index, which was up 4.6%.
The financial and industrial sectors were the largest contributors to this poor performance with Intu Properties (ITU), Netcare (NTC), Brait SA (BAT), Massmart Holdings (MSM) and KAP International (KAP) all down between 20% and 33%. Resources bolstered the index slightly with Gold Fields (GFI) and Impala Platinum (IMP) in positive territory, up 44% and 14% respectively.

During the June FTSE/JSE index review there were no inclusions or exclusions in the index. The one-way turnover for the index review was 1.15% due to changes in shares in issue and free float factors of some of the constituents in the index.

Market review

In December, the MSCI All Country World Index (ACWI) fell 7.2% in US Dollar, which is the worst December return for global equities on record since 1988. For the year, global equities returned a very disappointing -11.2%, which is the worst year since the 2008 Global Financial Crisis and the sixth worst year on record. Despite underperforming MSCI ACWI significantly in December, the US was the best performing region in 2018.

This performance was on the back off expectations that global growth is slowing, a tightening monetary policy, swelling fiscal deficits, earnings headwinds, and political uncertainty, which are all very legitimate and will probably grow more pronounced over the coming months and quarters. The Chinese PMI disappointed with the Shanghai stock exchange down 19% for the year despite the government attempting to stimulate demand by cutting the bank reserve requirement four times. The Brexit vote, which will take place in January, also created much uncertainty in the UK and the rest of Europe. Emerging Markets (-2.9%), Asia Pac ex-Japan (- 3.0%) and Europe (-4.7%) fell less than the global aggregate in December, but finished 2018 as the three worst performing regions.

However, the correction over the course of the last quarter of 2018, in particular the December meltdown, was probably too violent, overstating the immediacy of the aforementioned market risks.

Returning to South Africa, in comparison the local market underperformed emerging markets (EMs) materially in 2018, opening up the possibility of better performance in 2019, particularly for domestic focussed stocks in the SA market.

The poor returns from equities were on the back of poor business confidence which remains very weak as demonstrated by the South African Chamber of Commerce and Industry (SACCI) business confidence data. Private sector fixed capital formation has collapsed from 17% of GDP in 2007 to lows of 11% of GDP currently. Political uncertainty also weighed on the JSE as the finance minister’s confession at the Zondo commission of enquiry led to his recall by the president ahead of the Medium Term Budget. However, the appointment of former Reserve Bank Governor, Tito Mboweni - our fourth finance minister in three years - calmed the market’s nerves.

Following three months of negative total returns, SA Equities rebounded in December, with the ALSI (+4.3%) returning its second best monthly performance for 2018.The ALSI performance was boosted by SA Resources (+12.3%), posting its best monthly performance since July 2017.This was boosted by the Gold index that jumped a huge 25.2% in December, as investors looked to gold as a safe haven amid the global turmoil and US government shutdown.

During 2018 SA Equities (ALSI) lost 8.5% against 21% and 2.6% gains during the two previous calendar years. This was SA Equities’ worst annual loss since 2008 when the ALSI also lost about 8.5% in Rand terms. Across the JSE sectors, the dispersion of returns was very wide with Resources outperforming in 2018 with a total return of 15.5%. SA Financials shed 8.8% and SA Industrials were the worst performers among SA equities, losing 17.5% over the year.

The SAPY was the worst performing asset class with a total return of -25.3% (2017: +17.2%, 2016: +10.2%). Cash posted a total return of 7.2% in 2018 whilst SA Bonds were the best performing asset class, with the ALBI delivering a total return of 7.7% (2017: +10.2%).

Performance

The FTSE/JSE Mid Cap index (J201) was one of the few benchmarks with positive performance (+2.68%) in the fourth quarter of 2018. The resources sector was the biggest contributor to this positive performance with Anglogold (ANG), Gold Fields Ltd (GFI) and Impala Platinum (IMP) all in positive territory, returning 48%, 45% and 33% respectively. The Real Estate and Financial Services sectors were some of the worst performing sectors in the benchmark, which included counters like Intuprop (ITU) and Quilter (QLT), down -24% and -12% respectively.

During the December FTSE/JSE index review Vivo Energy plc (VVO) was deleted from the index. There were no inclusions in the index. The one-way turnover for the index review was 0.51%.

Conclusion

If the first week of trading in 2019 is anything to go by, then market participants look set for another volatile year. The week started off positively, buoyed by Trump’s tweet of ‘big progress’ between the US and China on their ongoing trade war. Despite the short-term positive, though, the fact remains that the three major economic issues of the US-China trade war, slowing economic growth and Brexit have yet to be properly resolved and until this is done, a sword of Damocles will remain hanging over global markets. We have been there before in 2008 when many expected a decade-long bear market for equities. And yet businesses adapt and adjust to tough economic conditions and in this context, we are of the view that patient equity investors will be rewarded with handsome returns over the next three years.